Smartsourcing: Driving Innovation And Growth Through Outsourcing

FOREWORD

WORK MOVES AS GLOBAL MARKETS BECOME REAL

The forces of globalization have finally kicked in. For years, business has talked about being global. But in truth, global often meant having a headquarters operation in London with distant branches elsewhere, and manufacturing products in countries with low labor costs.

Today, people, goods, and ideas move freely across the globe. The operations of headquarters are also scattered: the CEO sitting in New York; finance and accounting being performed in the Philippines; IT services delivered from Romania; and benefits programs administered from India. Material and product sourcing move between multiple countries as a function of price, quality, and speed. And customers are everywhere, expecting to be served with consistent quality and price, independent of location. The Internet has made markets global, even for the smallest company. In fact, information technology is the great enabler of these changes.

The migration to truly globalized operations has been occurring for some time. But three factors now require a new way of managing the movement of work: the scale of the geographical dispersion of work has increased dramatically; broad improvements in productivity have stepped-up the pressures of competitiveness as companies are driven to become more and more efficient; and the work that is moving — onshore as well as offshore — is increasingly intellectual, not just physical. Another way of describing the current condition is that the brains of an organization are now moving, not just the brawn.

But for many companies that have tried outsourcing or off-shoring, the experience of moving work has not been good. Service quality has sometimes decreased, rather than being improved; and companies have become less agile in their ability to adapt to changing markets, rather than more agile.

There are multiple causes for the failures of outsourcing. Service relationships are often just focused on price, rather than on creating some new business value. Deal structures are made too rigid for too long a period of time. Service providers can lack process competency as well as scale. Relationships often lack transparency. Companies can also be unreasonable, unwilling to accept standard ways of doing simple processes, arguing that their needs are special, when, in fact, industry standards should be applied.

This book offers prescriptions about how to outsource and offshore intelligently. The term smartsourcing is an appropriate moniker for what companies must do. Work cannot simply be thrown over corporate walls, and it's not just processes that move. Competencies get outsourced, and competencies are a combination of processes, people, and attitudes.

So an intelligent outsourcing proposition must consider how a service partner will manage processes and people consistent with corporate needs and how the behavior of a service partner can be synchronized with the culture of a company that outsources. Once a decision on what to outsource has been made, being smart requires a cultural match.

Outsourcing and offshoring also require a high degree of transparency. Work across a value chain must be efficiently integrated, and transparency becomes critical in order to design cross-organizational processes that are in harmony — not conflict. Being smart doesn't mean being secretive. In fact, it's just the opposite that becomes important. Be prepared to open up to a service provider and also demand that a service provider be open about its costs and operations.

And to get the most value out of outsourcing, be prepared to use the resources and capabilities that sit within the network of your industry, from suppliers to customers. Know what is operationally unique to your company and be prepared to use the resources of your industry in the form of standard operating processes. There is no need to reinvent what others have done well — especially on the increasingly weak argument that what your company does is different. Yes, there must be differentiation to compete, but that differentiation need not be in all processes.

Open markets and information technology have made intellectual work movable. Work will naturally go to where it can be best done — in quality and price. Trying to prevent this movement will just result in protected and weak economies. The movement of work must be intelligently managed and intelligently replaced in an increasingly dispersed world.

Jim Champy

July 2005

ACKNOWLEDGMENTS

A journalist I worked with once said to me, It is much better to have written than to be writing. Her point being that the real joy in writing is to have and see the final work. In most all cases that is true, but occasionally a project comes along that is so compelling as to draw you into the process of writing in an almost addictive way. Such was the case with this book. The topic was seductive in its appeal, taking us as authors through a fascinating journey, challenging what we knew and introducing us to ideas we had barely considered at the outset.

It was an ambitious undertaking to consider the ways in which globalization would change so much of what we have taken for granted in the way organizations and societies operate. As we made our way along that journey, something happened that caused us to get even more excited by the project. Associates, friends and family were also drawn into the discussion, voicing their own opinions, ideas, and prognostications. Their input is found throughout this book, sometimes in profound contributions and at other times as subtle undercurrents, but in all cases as an essential part of the ideas we have put forward.

To take only a few pages to thank all of these individuals, whose contribution we feel is so great, seems patently unfair. Yet, these few pages may, at the end of the day, be the most important of this book as they truly embody the spirit of collaboration, creative thought, and innovation that we have tried to capture in the few hundred pages that follow.

To begin, we were inspired by the direction and mentoring of our long-time friend and colleague Jim Champy. Jim is one of a rare breed of very successful people who has maintained his ability to see beyond his own success and continue help those around him. His insights have been foundational in helping us to see through the complexity of the topic and to hopefully cuts to its core. We've dedicated this book to Jim for the tremendous impact he has had on not only our own thinking but also on the much broader contemporary ideas we all share about the evolution and engineering of enterprise.

Jim was also the person who introduced me to Peter Drucker many years ago. Sadly, Peter passed away as this book was being finalized. He was always an enormously kind and generous person, working with Delphi on a variety of our efforts and giving me the great privilege of working with him. Many of the ideas and opinions expressed in this book, especially those on the shift from ownership to strategy, had their origins in my many discussion with Peter. He was a brilliant and wonderfully entertaining man, but more importantly, a caring mentor.

I have to thank my parents for my own introduction to globalization, which began as a child going back and forth to Europe. I was fascinated as I watched firsthand the narrowing disparity between countries separated by so much distance. My father, who traveled extensively throughout the globe, brought home tales of other cultures that fed my curiosity and created an appreciation for the fertile ground in which the seeds of smartsourcing were planted. His stories of glowing praise for Asia, vivid descriptions of India, China, and Japan, at a time when these were still exotic locations and developing economies, well outside of the mainstream of conversation, created a spark whose flames were quickly fanned by the growing popularity of the topic in later years.

The project would never have gotten beyond the bright idea stage were it not for my longtime literary agent John Willig. John's guidance and encouragement was invaluable. As is the case with most authors, I am often approached by friends and associates who aspire to write a book. Their question is inevitably, Where do I start? Trying to write a book without a trusted agent is akin to climbing Everest without a Sherpa — getting 90% of the way to the summit just doesn't count.

Jill Alexander and the wonderful team at Adams Media saw the promise in this book and have worked hard and enthusiastically on the project. Jill has has been, without any doubt, the most astute and committed editor I have come across in my experience as an author. She took it upon herself to help develop the ideas and position of the book in a way that is far above the call of duty for many editors. Having her so fully dedicated to the project was inspiring. The marketing team at Adams Media, Gene Molter, Karen Cooper, and Steve Quinn, were very quick studies and immediately embraced the project. Behind the scenes, our copyeditor Heather Padgen did a magnificent job of not only making sure we were actually true to the English language but also checked our facts, quotes, and examples. Her work may be invisible to readers but we saw the changes and are grateful for her attention to every detail. (By the way, her work was outsourced!)

During the early stages of the book's development, Anupam Gosh joined us as an intern and helped with our first drafts. Slugging his way through what were, at the time, gaping holes in logic, grammar, and facts, he nonetheless provided us with a thorough review of the raw material and a ground-zero view of the outsourcing and offshoring.

General Stephen B. Croker was very kind to take the time to give us such an incredible and intimate view into the way changing military doctrine has influenced the structure and operations of the military and the formation of a joint forces approach to war and peace. It is rare to find someone who is so knowledgeable and yet also so incredibly articulate. So amazing was his recall and ability to talk about military doctrine off the cuff that the Q&A with him in Chapter 4 barely needed any editing. That interview gives you the clear sense that a highly structured organization can transform itself through adaptive methods and technologies and that the military continues to be an archetype for the way a modern enterprise should be run. Thanks go to Lt. Col. Jon Tigges who introduced me to General Croker.

The closing chapter of this book was perhaps the hardest to write. I had struggled with many versions for some time, and was just not able to hit the mark with any of them. Then, in a case of sudden serendipity, I was invited to join a group of some 25,000 youngsters at a global competition held at The University of Tennessee for a program called Destination Imagination (DI). DI is a global program that teaches kids in K-12 creative problem-solving skills. After returning from the competition, it took me about two hours to compose the outline for the book's closing. What became clear at that competition was that the world these kids would inhabit not only needed an entirely new set of skills but that there were places for them to go to get the necessary skills. DI is a magnificent program that is building a bridge to the future for the next generation of problem solvers. I am deeply grateful to a few key folks who brought me into the DI program: Dan Fague, Roger Garriock, Bob Purifico, Linda Wayne, Susan Nunemaker, Laura Barc, Dr. Donald Treffinger, and Dr. Edwin Shelby. I applaud the dedication of these individuals to our childrens' future.

Having been part of the talented team at Perot Systems has given us both a front-row view of the changes that globalization, outsourcing, and offshoring are bringing to organizations. More importantly, they have shown us firsthand how these factors, often disparaged by popular media, can be constructive and essential aspects of building a thriving economy, in the United States and across the globe. Being part of the vast industry transformations that are brought on by smartsourcing comes with a high calling in terms of integrity and trustwor-thiness. Perot Systems, and its associates, epitomize these values in their words and actions. We are indebted to this exceptional team for their support and contributions to our thinking.

For the past seventeen years, a core group of exceptionally committed and bright individuals have been at the center of my personal universe of thought leadership. They are the founders and partners of Delphi Group. Together, they form one of the most powerful and focused teams in the industry. Carl Frappaolo, Nick Koulopoulos, MaryAnn Koslowski, Nathaniel Palmer, Carlene Lanier, Dan Keldsen, Linda Wynott, Hadley Reynolds, Ralph Marto, Tom Reed, Susy Martins, and Rich DiLonardo have been my greatest allies. Many of their ideas have helped to shape markets and were the genesis for much of what is in this book, from Nathaniel's ideas on business process orchestration to Hadley's perspectives about On Demand, Carl's groundbreaking work in the area of knowledge management, and Dan's forward thinking on social networks. It is beyond rare to bring together such incredible talents, much less to keep them together for so long. I am honored to be a member of their team.

Finally, when all is said and done, those who ultimately provided both of us with the greatest inspiration and support were, of course, our families. Authors do not exist who have not thought about what it would mean to a member of their immediate family, a spouse, parent, or child to pick up their book and read it, while simultaneously thinking of the time it takes away from family to write a book. It seems small recompense to get a few lines in an acknowledgment in return for such a sacrifice. Debbie, Michelle, Mia, Adam, Jackson, and Alexandra, as grand as we may hope our ideas to be, they pale against the gratitude we have for your support, inspiration and love.

Thomas M. Koulopoulos

and Tom Roloff

Boston, December 2005

INTRODUCTION

And it ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.

— Niccolo Machiavelli

A MILLENNIUM OF CHANGE

This book is about a journey that started long before the topic of globalization became popular. It is a journey through the evolution of the way we work and the structure of the places we work in. It is a winding journey that meanders and takes us through 500 years of change; and whose path will lead us into the next 500 years. A millennium of change packaged in a book that occupies only a few hundred pages. Overly ambitious? Yes, but the topic is far too complex and its outcome is far too important to trivialize by taking too narrow a path.

The thread of this story will take you to places you may never have considered going, from the changing role of education, to lessons on globalization, to detailed prescriptions and frameworks for deploying a global strategy and choosing global partners. There are no railroad tracks for this discussion. In many ways, this book reflects the reality and the challenge of blazing a new trail, creating a new vocabulary, and establishing a shared experience for the tough decisions ahead.

At the same time the premise of this book is simple; namely, that the mobility of work is propelling rates of disruption, discomfort, innovation, and opportunity for which it is difficult to find a historical comparison. While this book will cover much ground in describing the way this mobility has evolved, framing its impact and prescribing behaviors and methods to adapt to it, its components are found in three sections: mobilizing the power needed to do work, mobilizing the people who do the work, and mobilizing the work itself.

Many of the revolutions that have occurred in industry, commerce, and political and social institutions can be traced back to shifts in these three fundamentals. Today we are at the threshold of a base shift in mobility as globalization alters the way in which businesses make decisions about where work can and should be performed. Traditional notions about the workplace, competency, and innovation are being challenged and redrawn on a global canvas, with implications that we are only starting to understand.

This mobility in the work force, even though it is called by the new name of outsourcing, is hardly a new topic. In the late eighteenth century, the global economy was rocked by a series of propitiously timed innovations and events that together created not only the industrial revolution, but also a precedent for the mobility of work. James Watt's coal-fueled portable steam power altered nearly every aspect of the economies of the eighteenth and nineteenth centuries by mobilizing the power needed to run industry and transportation. Manufacturing, automation, and immigration were launched by this one innovation. No longer were workers or work local. People, raw materials, and knowledge could be brought to whatever place was best equipped to accept the commercial, social, and political opportunities offered.

Much has changed in the last few hundred years, but what we are experiencing today as businesses look to globalization in order to obtain lower cost alternatives for goods and services is hardly a new phenomenon. The current political and social debates about this age-old topic may gain greater visibility as the media itself gains greater power to transmit the images and implications of globalization. There is far more to the discussion than most of us have yet to fully appreciate. The topic of using outsourcing to cut costs, which has occupied the headlines so far, is only the smooth tip of the iceberg. The jagged edges and the greater challenges to our organizations lie just below the waterline and out of sight of most debates.

These more difficult and powerful forces are what this book labels as smartsourcing. These forces are the dynamics that will play out not only in the U.S. economy, but also throughout all of the world's economies as we start to make the gradual but determined global shift to metrics that are based fundamentally on innovation, rather than manufacturing and services.

Smartsourcing is the rule book for this new global economy — an economy that is based fundamentally on mobility, innovation, and the creation of a new set of attitudes about how we measure the value of our organizations and our people. It presents us with the final bridge we need to cross from the industrial to the innovation age economy.

This book will offer insights on how to build that bridge.

Part I explores the basic ingredients of smartsourcing. It frames the forces that have defined organizations to the present day — and discusses what will define them in this next era. The concepts of core competency, economies of scale, and work mobility are addressed, as are the roles of innovation and risk transference, and the impact of uncertainty in decision-making.

Part II delves into the nuts and bolts of the business of smartsourcing. You'll learn how to make sourcing decisions, as well as what defines the value of the smartsourcing approach — beyond simple cost reduction. The challenges to smartsourcing and how to manage the resulting firm are also addressed. Our objective is to go beyond the philosophy of globalization and provide you with the frameworks you need to embark on a smartsourcing initiative with confidence and competency.

Part III discusses the impact of smartsourcing on the structure of organizations. It explores how products and services will be created and delivered in the future, as well as some of the key technologies that will enable the creation of extended enterprises. Most importantly, we will look at the do's and don'ts of winning in this new environment. This section concludes with a look at how smartsourcing will change many basic institutions and notions of the organization — and offers some predictions about the legacy of globalization. The objective is to provide a context for the developments to come that will accelerate and mature the precepts of globalization — and reinforce the assertion that smartsourcing will be one of the defining trends of our age.

Make no mistake, progress here will not come easy. Consider that half of all organizations have yet to even consider using outsourcing, while 75 percent have yet to consider its global counterpart, offshoring. The reluctance with which many organizations and managers are approaching smartsourcing stems from their already high level of resistance to simply outsourcing core aspects of their business. Such resistance is not surprising given the real high-stakes obstacles to outsourcing — and the recent public outcry about jobs being shipped overseas. Backlash against outsourcing is the political issue du jour and public debate on its pros and cons will most likely rage on for the next several years.

With this kind of attitude toward the most basic component of smartsourcing, how can we be so antithetically optimistic about its impact? In short, because the current prevailing public sentiment is overly risk averse. It is steeped in antiquated thinking about what can be sourced through partners and, until only recently, heavily biased by the lack of technologies and methods available for outsourcing sophisticated processes. Nevertheless, a watershed is approaching. And its impact will be greatest on those who are most firmly set against change.

While today's hard-dollar savings are appealing for all of the obvious reasons, the soft-dollar contributions that drive the numerator of most business models are much more crucial in transforming industries. One has only to look at the incredible track record of innovation over the course of the last fifty years to understand that the greatest changes, those that drive industries to new heights, consistently come from those outside the mainstream, with the least amount vested in the current way of doing business and most willing to adopt new approaches.

The shelves of stores are packed with products that should never have made it if surveys and focus groups had scripted the future. Markets do not shape innovation as much as markets are shaped by innovation. New innovations redefine the way we experience the world, which in turn change our behaviors. After all, what would a citizen of the 1950s have thought of the sight of millions of people wandering the streets of any major metropolis in relative oblivion while earphones attached to MP3 players, cell phones, and PDAs link them to a virtual network connected to any point on the globe?

Similarly, what would we make of a world in which employment hinges on an economy